Abstract
To sin, or not to sin: that has been the question for many people for a long time, and nowadays that question has moved to the financial markets. The existence of studies that show that investing in vice sectors such as the alcohol, tobacco, and gambling industries, collectively known as the “triumvirate of Sin”, is profitable has created some uncertainty for investors who wonder whether or not to be socially responsible. We show that by implementing an investment strategy based on the Fama–French five-factor model, “saint” investors obtain better portfolio performance, even when transaction costs are taken into consideration, and therefore they are the ones chosen to knock on the door of portfolio performance heaven.
Highlights
In the early 1960s, Socially Responsible Investment was based on negative criteria that excluded “sin” assets from portfolios, i.e., those related to alcohol, tobacco and the gambling industry, among others, see [1,2]
With the rolling Fama–French five-factor regressions for each ETF estimated, we show in Tables 5 and 6 the performance of the two proposed strategies: the long-only strategy and the long risk-free strategy, and those related to the naïve strategy for all the portfolios
Given the different studies showing the profitability of the “triumvirate of Sin” investments, investors may be unsure whether to invest in these sectors and become “sinners”, or remain “saints” and invest in socially responsible sectors
Summary
In the early 1960s, Socially Responsible Investment (hereafter SRI) was based on negative criteria that excluded “sin” assets from portfolios, i.e., those related to alcohol, tobacco and the gambling industry, among others, see [1,2]. Investors began to consider the good practices of listed companies and invest in companies commonly referred to as “best in class”, see [3,4,5,6] It was not until the beginning of the 21st century that the term became popular with the launch of the United Nations Principles for Responsible Investment. SRI consists of incorporating financial aspects such as return, risk and liquidity, as well as other aspects related to the company’s good environmental, social or corporate governance (ESG) practices, into the asset selection process. Other more specific concepts are covered such as the so-called green investment that only considers the environmental objectives of sustainable investors, see [7,8,9], or impact investment that considers social aspects, see [10]
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